Newsletter
EFFECT OF BOND CONVERSION RESERVES SET BY ARTICLES OF INCORPORATION
Under the Company Law, the number of a company's shares reserved for the conversion of convertible bonds is no longer one of the matters that is ineffective unless stated in the company's Articles of Incorporation (AOI). Therefore the number need not be stated in the AOI, and may be flexibly adjusted by the board of directors in accordance with actual needs, within the limits of the company's authorized capital. This en-ables the board to take timely action to adjust the number of the shares reserved for the conversion of convertible bonds so as to facilitate the com-pany's operations.
A company may still choose to state the number of shares reserved for conversion of corporate bonds in its AOI. But if it does so, this number cannot be changed at the discretion of the board, and the shares so designated may not be issued for any other purposes (i.e. they may not be used for rights offer, conversion of retained earnings or capital reserve to capital, etc.). Therefore, if the company plans to issue new shares other than for the conversion of bonds, it should first de-termine whether it needs to amend its AOI to increase its authorized capital or adjust the number of shares reserved for bond conversion, by calculating whether the number of shares that remain, after subtracting both its paid-in capital and the number of shares currently reserved for bond conversion from its total authorized capital, is sufficient to support the issuance of the in-tended number of new shares.
For example, a company has authorized capital of NT$1 billion and paid-in capital of NT$600 million, and its AOI state that NT$200 million of its shares are reserved for the conversion of corporate bonds. Thus the quantity of shares available for the issuance of new shares other than for the conversion of corporate bonds is NT$200 million. If the company intends to issue new shares of less than NT$200 million, it has no need to amend its AOI; but if it intends to issue new shares of more than NT$200 million, it will need to amend its AOI to increase its authorized capital or to reduce the number of shares re-served for bond conversion. It should be noted that if the company amends its AOI to increase its authorized capital to NT$1.2 billion, then when it issues new shares, it must issue all of its previously unissued capital (NT$200 million) plus at least one quarter of the amount of the increase in capital (NT$50 million); in other words, it must issue new shares of at least NT$250 million.
If the AOI do define a number of shares reserved for the conversion of corporate bonds, then the quantity indicated must be reserved for bond conversion alone. After convertible bonds are converted into shares, the AOI should be amended to reduce the remaining number of re-served shares accordingly. The company may withhold the amendment to its AOI to delete the quantity reserved for bond conversion until all outstanding convertible bonds have been con-verted into shares or have been redeemed for cash at maturity.
For example, if the AOI set the quantity of shares reserved for bond conversion at NT$200 million, then once the entire NT$200 million of con-vertible bonds have been converted, and the company applies to change its registration details to reflect the issuance of new shares against the converted bonds, then as a reminder the com-pany registration authorities will add wording to the approval letter stating that a motion should be proposed at the next shareholders' meeting to amend the AOI by deleting the indication of a number of shares reserved for conversion of corporate bonds.